1. ACCOUNTING FOR PARTNERSHIPS

2. Forming a Partnership
Partner’s initial investment should be recorded at the fair market value of the assets at the date of their transfer to the partnership.
E12-2 Meissner, Cohen, and Hughes are forming a partnership. Meissner is transferring $50,000 of cash to the partnership. Cohen is transferring land worth $15,000 and a small building worth $80,000. Hughes transfers cash of $9,000, accounts receivable of $32,000 and equipment worth $19,000. The partnership expects to collect $29,000 of the accounts receivable.
Instructions: Prepare the journal entries to record each of the partners’ investments.
LO 2 Explain the accounting entries for the formation of a partnership.

3. Forming a Partnership
E12-2 Meissner is transferring $50,000 of cash to the partnership. Prepare the entry.
Cash 50,000
Meissner, Capital 50,000
Cohen is transferring land worth $15,000 and a small building worth $80,000. Prepare the entry.
Land 15,000
Building 80,000
Cohen, Capital 95,000
LO 2 Explain the accounting entries for the formation of a partnership.

4. Forming a Partnership
E12-2 Hughes transfers cash of $9,000, accounts receivable of $32,000 and equipment worth $19,000. The partnership expects to collect $29,000 of the accounts receivable. Prepare the entry.
Cash 9,000
Accounts receivable 32,000
Equipment 19,000
Allowance for doubtful accounts 3,000
Hughes, Capital 57,000
LO 2 Explain the accounting entries for the formation of a partnership.

5. Dividing Net Income or Net Loss
Partners equally share net income or net loss unless the partnership contract indicates otherwise.
Closing Entries:
Close all Revenue and Expense accounts to Income Summary.
Close Income Summary to each partner’s Capital account for his or her share of net income or loss.
Close each partners Drawing account to his or her respective Capital account.
LO 3 Identify the bases for dividing net income or net loss.

6. Dividing Net Income or Net Loss
Income Ratios
Partnership agreement should specify the basis for sharing net income or net loss. Typical income ratios:
Fixed ratio.
Ratio based on capital balances.
Salaries to partners and remainder on a fixed ratio.
Interest on partners’ capital balances and the remainder on a fixed ratio.
Salaries to partners, interest on partners’ capital, and the remainder on a fixed ratio.
LO 3 Identify the bases for dividing net income or net loss.

7. Dividing Net Income or Net Loss
Question
Which of the following statements is correct?
Salaries to partners and interest on partners' capital are expenses of the partnership.
Salaries to partners are an expense of the partnership but not interest on partners' capital.
Interest on partners' capital are expenses of the partnership but not salaries to partners.
Neither salaries to partners nor interest on partners' capital are expenses of the partnership.
LO 3 Identify the bases for dividing net income or net loss.

8. Dividing Net Income or Net Loss
Exercise: F. Astaire and G. Rogers have capital balances on January 1 of $50,000 and $40,000, respectively. The partnership income-sharing agreement provides for (1) annual salaries of $20,000 for Astaire and $12,000 for Rogers, (2) interest at 10% on beginning capital balances, and (3) remaining income or loss to be shared 60% by Astaire and 40% by Rogers.
Instructions
(a) Prepare a schedule showing the distribution of net income, assuming net income is (1) $55,000 and (2) $30,000.
(b) Journalize the allocation of net income in each of the situations above.
LO 3 Identify the bases for dividing net income or net loss.

9. Dividing Net Income or Net Loss
Exercise Prepare a schedule showing the distribution of net income, assuming net income is (1) $55,000 and (2) $30,000.
Net income is $55,000

10. Dividing Net Income or Net Loss
Exercise Prepare a schedule showing the distribution of net income, assuming net income is (1) $55,000 and (2) $30,000.
(2) Net income is $30,000
LO 3 Identify the bases for dividing net income or net loss.

11. Dividing Net Income or Net Loss
Exercise Journalize the allocation of net income in each of the situations above.
(1)
Income summary 55,000
F. Astaire, Capital 33,400
G. Rogers, Capital 21,600
(2)
Income summary 30,000
F. Astaire, Capital 18,400
G. Rogers, Capital 11,600
LO 3 Identify the bases for dividing net income or net loss.

12. Dividing Net Income or Net Loss
Look page another Exercise

13. Partnership Financial Statements
Illustration 12-7
As in a proprietorship, partners’ capital may change due to (1) additional investment, (2) drawing, and (3) net income or net loss.
LO 4 Describe the form and content of partnership financial statements.

14. Partnership Financial Statements
Illustration 12-8
The balance sheet for a partnership is the same as for a proprietorship except for the owner’s equity section.
LO 4 Describe the form and content of partnership financial statements.

15. Liquidation of a Partnership
Ends both the legal and economic life of the entity.
In liquidation, sale of noncash assets for cash is called realization. To liquidate, it is necessary to:
Sell noncash assets for cash and recognize a gain or loss on realization.
Allocate gain/loss on realization to the partners based on their income ratios.
Pay partnership liabilities in cash.
Distribute remaining cash to partners on the basis of their capital balances.
LO 5 Explain the effects of the entries to record the liquidation of a partnership.

16. Liquidation of a Partnership
No Capital
Deficiency
Look (illustration 12-9) page 526
LO 5 Explain the effects of the entries to record the liquidation of a partnership.

17. Liquidation of a Partnership
No Capital
Deficiency
E12-8 variation The ARES partnership at December 31 has cash $20,000, noncash assets $100,000, liabilities $55,000, and the following capital balances: Cassandra $45,000 and Penelope $20,000. The firm is liquidated, and $120,000 in cash is received for the noncash assets. Cassandra and Penelope income ratios are 60% and 40%, respectively.
Instructions:
Prepare a cash distribution schedule.
LO 5 Explain the effects of the entries to record the liquidation of a partnership.

18. Liquidation of a Partnership
No Capital
Deficiency
Liquidation of a Partnership
E12-8 variation Prepare a cash distribution schedule.
1 & 2 3 4
LO 5 Explain the effects of the entries to record the liquidation of a partnership.

19. Liquidation of a Partnership
No Capital
Deficiency
Liquidation of a Partnership
E12-9 Data for The ARES partnership are presented in E12-8.
Prepare the entries to record:
The sale of noncash assets.
The allocation of the gain or loss on liquidation to the partners.
Payment of creditors.
Distribution of cash to the partners.
LO 5 Explain the effects of the entries to record the liquidation of a partnership.

20. Liquidation of a Partnership
No Capital
Deficiency
Liquidation of a Partnership
E12-9 Prepare the entries to record: a) The sale of noncash assets. b) The allocation of the gain or loss on liquidation to the partners. c) Payment of creditors. d) Distribution of cash to the partners.
(a)
Cash 120,000
Noncash assets 100,000
Gain on realization 20,000
(b)
Gain on realization 20,000
Cassandra, Capital ($20,000 x 60%) 12,000
Penelope, Capital ($20,000 x 40%) 8,000
LO 5 Explain the effects of the entries to record the liquidation of a partnership.

21. Liquidation of a Partnership
No Capital
Deficiency
Liquidation of a Partnership
E12-9 Prepare the entries to record: a) The sale of noncash assets. b) The allocation of the gain or loss on liquidation to the partners. c) Payment of creditors. d) Distribution of cash to the partners.
(c)
Liabilities 55,000
Cash 55,000
(d)
Cassandra, Capital 57,000
Penelope, Capital 28,000
Cash 85,000
LO 5 Explain the effects of the entries to record the liquidation of a partnership.

22. Liquidation of a Partnership
Question
The first step in the liquidation of a partnership is to:
allocate gain/loss on realization to the partners.
distribute remaining cash to partners.
pay partnership liabilities.
sell noncash assets and recognize a gain or loss on realization.
LO 5 Explain the effects of the entries to record the liquidation of a partnership.

23. Liquidation of a Partnership
Capital
Deficiency
Look page 528
LO 5 Explain the effects of the entries to record the liquidation of a partnership.

24. Liquidation of a Partnership
Capital
Deficiency
Liquidation of a Partnership
E Prior to the distribution of cash to the partners, the accounts in the NJF Company are: Cash $28,000, Newell Capital (Cr.) $17,000, Jennings Capital (Cr.) $15,000, and Farley Capital (Dr.) $4,000. The income ratios are 5:3:2, respectively.
Instructions
(a) Prepare the entry to record (1) Farley’s payment of $4,000 in cash to the partnership and (2) the distribution of cash to the partners with credit balances.
(b) Prepare the entry to record (1) the absorption of Farley’s capital deficiency by the other partners and (2) the distribution of cash to the partners with credit balances.
LO 5 Explain the effects of the entries to record the liquidation of a partnership.

25. Liquidation of a Partnership
Capital
Deficiency
Liquidation of a Partnership
E (a)
(a)
Cash 4,000
Farley, Capital 4,000
Newell, Capital 17,000
Jennings, Capital 15,000
Cash 32,000
LO 5 Explain the effects of the entries to record the liquidation of a partnership.

26. Liquidation of a Partnership
Capital
Deficiency
Liquidation of a Partnership
E (b)
(b)
Newell, Capital 2,500
Jennings, Capital 1,500
Farley, Capital 4,000
Newell, Capital 14,500
Jennings, Capital 13,500
Cash 28,000
LO 5 Explain the effects of the entries to record the liquidation of a partnership.

27. Liquidation of a Partnership
Question
If a partner with a capital deficiency is unable to pay the amount owed to the partnership, the deficiency is allocated to the partners with credit balances:
equally.
on the basis of their income ratios.
on the basis of their capital balances.
on the basis of their original investments.
LO 5 Explain the effects of the entries to record the liquidation of a partnership.